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I’m going out on a limb here and thinking the U.S. dollar may need to take a breather here for a moment. I’m going to review a few charts to explain my reasoning…

First up is the slight divergence I’m seeing in the Ultimate Osc., which is a momentum indicator that takes into account three different time frames. It’s a small divergence and I’d prefer to see the Ultimate Oscillator break down further for me to get more confident in this opinion, but a divergence nonetheless.

I’ve discussed COT data before, and below is a chart showing the net positions in the euro. As you can see, commercial traders (green line) have never been more net-long the euro since 2007. While ‘small traders’ (blue line) have never been more net-short during the same time period. Typically the commercials win this tug-of-war, but the time it takes to declare a winner is the key variable.

Finally, the EUR/USD pair has fallen hard and fast and now sits just above the 78.6% Fibonacci retracement level.

With all that being said, and the constant chatter that comes out of the Europe as they try to solve the woes of Greece, a lot could still impact the dollar. Bernanke’s quantitative easing programs have not supported a strong dollar, and if we get an additional round this summer (which is anyone’s guess) then we could see history repeat itself with a contraction in the dollar. Long-term I think parity for the EUR/USD is not out of the question but few things that important happen in a straight line.

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